UPWARD REVIEW

Cost of borrowing up as CBK hikes benchmark rate to 7.5%

The first hike since July 2015.

In Summary
  • It is expected that the recent waiver of import duty on maize and subsidies on fertilizer prices will continue to moderate domestic prices.
  • The MPC will meet again in July 2022 but remains ready to re-convene earlier if necessary.
Central bank governor Partick Njoroge speaks to journalists during a press conference at central bank Nairobi on June 20, 2019.
Central bank governor Partick Njoroge speaks to journalists during a press conference at central bank Nairobi on June 20, 2019.
Image: EZEKIEL AMING'A

The cost of borrowing in the country is set to increase after the Central Bank of Kenya (CBK) reviewed the base lending rate upwards by 0.5 per cent. 

The regulator's Monitory Policy Committee (MPC) meeting Monday increased the benchmark rate to 7.5 per cent, the first hike since July 2015.

The MPC said it will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take additional measures as necessary.

It attributed the increase to elevated risks to the inflation outlook following increased global commodity prices and supply chain disruptions.

The committee that meets after two months painted a gloomy picture of the global economic outlook, terming it uncertain, due to the impact of the ongoing Russia-Ukraine conflict.

Other factors include uncertainty about the required policy responses in the advanced economies, effects of Covid-19 containment measures in China, and persistent supply chain disruptions.

The pace of global economic growth has decelerated mainly reflecting the slowdown in the U.S. and China.

Global inflationary pressures remain elevated reflecting the impact of the sharp increase in prices of commodities particularly fuel, fertiliser, edible oils, and wheat.

''Financial market volatility has also increased significantly amid the recent adjustments in monetary policy in advanced economies,'' CBK said. 

The persisting uncertainty continues to pile pressure on the cost of living, with inflation rising almost by a percentage in April to hit 6.5 percent compared to 5.6 per cent mainly due to higher food and fuel prices.

It is expected that the recent waiver of import duty on maize and subsidies on fertilizer prices will continue to moderate domestic prices.

The committee highlighted that exports of goods remained strong, growing by 11.1 percent in the 12 months to April 2022 compared to a similar period in 2021.

In particular, tea and manufactured goods exports increased by 1.3 percent and 25.2 percent respectively over the period.

Imports of goods increased by 29.0 percent in the 12 months to April 2022 compared to a decline of 5.7 percent in the 12 months to April 2021, mainly reflecting increased imports of oil and intermediate goods.

The current account deficit is estimated at 5.1 per cent of GDP in the 12 months to April 2022, it is projected at 5.9 percent of GDP in 2022 on account of higher international oil prices.

Tourism and transportation receipts have increased as international travel continues to improve. Remittances totaled $3,968 million in the 12 months to April 2022 and were 20.0 percent higher compared to a similar period in 2021.

The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios.

Even so, the ratio of gross non-performing loans (NPLs) to gross loans rose to 14.1 per cent in April 2022, compared to 14 per cent in February.

A high default rate was noted in the building and construction, manufacturing, trade and transport and communication sectors.

These increases were attributable to specific challenges in the respective businesses, and banks have continued to make provisions for the NPLs.

The private sector credit increased to 11.5 per cent in April 2022, from 9.1 per cent in February.

Strong growth Strong was observed in transport and communication (28.9 per cent), manufacturing (12 per cent), trade (10.7 per cent), consumer durables (16.1 per cent), and business services (12.2 per cent).

The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities.

The Committee will meet again in July 2022 but remains ready to re-convene earlier if necessary.